ISSN 1681-4789 2315-0815 Manuals and guidelines 2014 edition
Manuals and guidelines 2014 2013 edition
Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): 00 800 6 7 8 9 10 11 (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). More information on the European Union is available on the Internet (http://europa.eu). Cataloguing data can be found at the end of this publication. Luxembourg: Publications Office of the European Union, 2014 ISBN 978-92-79-37841-6 ISSN 2315-0815 doi: 10.2785/52688 Cat. No: KS-GQ-14-003-EN-N Theme: Economy and finance Collection: Manuals and guidelines European Union, 2014 Reproduction is authorised provided the source is acknowledged.
Contents Contents Preface... 5 Purpose of the manual... 5 Summary conclusions... 7 Section 1 Introduction... 10 Section 2 ESA 2010 guidance... 12 Goods for processing and processing services... 12 Goods under merchanting... 13 Quasi transit trade... 17 Non-resident transit trade... 17 Goods for repair... 20 Re-exports... 20 Section 3 Conceptual issues... 21 Guidance... 21 Numerical example... 22 Section 4 Analysis... 24 Reconciling national accounts and merchandise trade statistics... 24 Impact on SUT balancing... 24 Section 5 Compilation guide... 27 International Merchandise Trade Statistics (IMTS)... 27 Customs procedures... 27 Nature of Transaction codes... 28 Surveys... 32 Business surveys... 32 Balance of Payments surveys... 33 Other sources... 34 Recommended sources for each activity... 35 Section 6 Task force recommendations... 40 References... 46 Annex A Model survey questions to collect Goods for Processing information... 47 Inward processing... 47 Outward processing... 47 Example of a questionnaire on manufacturing services... 48 Annex B Nature of Transaction case studies... 50 Case I Processing with subsequent sale to another Member State... 50 Case II Processing with subsequent sale in Member State of processing... 51 Case III Processing with subsequent sale within the initial Member State of export... 53 Case IV Processing under contract with several suppliers... 55 3
Contents Case V Goods with negligible value sent for processing... 57 Case VI Multi-country processing... 59 Case VII Return of unprocessed goods... 62 Case VIII Processing vs. waste disposal... 62 Annex C IMTS Supplement to the Compiler Manual use of customs procedures... 64 Annex D Reconciliation between IMTS source data and trade in goods on a BoP and NA basis... 66 Annex E Extra examples of quasi transit trade... 67 Glossary... 68 4
Purpose of the manual Preface The treatment of goods sent abroad for processing is one of the changes introduced in the updated European System of Accounts (ESA 2010) that has the most significant impact on national accounts and balance of payments compilation. The sets out the implementation issues facing national accounts and balance of payments compilers, providing Member States with the guidance necessary to compile data in a reliable and comparable way. Under ESA 95, a change of ownership was imputed for goods sent abroad for processing, even when the financial flows indicated that there was no transfer in ownership of the goods. Under ESA 2010, goods sent abroad for processing will be recorded on a strict change of ownership basis, meaning that where goods sent abroad do not change ownership, they are excluded from the trade in goods data. Instead, the cost of the processing service is recorded as trade in services (manufacturing services on physical inputs owned by others). ESA 2010, SNA 2008 and BPM6 present a consistent conceptual approach for recording goods sent abroad for processing in national accounts and balance of payments, but the collection and compilation of statistics in line with the new concepts is not straightforward. At the invitation of Directors of Macro Economic Statistics (DMES), Eurostat set up a task force in 2011 to consider the implementation of the new standards, so that reliable and comparable statistics can be produced. This manual follows the recommendations and conclusions of the task force. Purpose of the manual The sets out the conceptual change introduced in ESA 2010 and discusses the implementation issues facing national accounts compilers. It describes the sources and methods that can be used to compile data in line with the new standards, and gives Member States the guidance needed to compile data in a reliable and comparable way. Section 1 presents an example to explain the conceptual change for goods sent abroad for processing introduced by the new international standards. The example sets out how goods sent abroad for processing transactions are presented in ESA 2010. ESA 2010 also provides guidance on other aspects of multinational activity that are closely related to goods sent abroad for processing: manufacturing services on physical inputs owned by others (called processing services in this manual); merchanting; quasi transit trade; re-exports; and goods sent abroad for repair. Section 2 presents the international guidance for each of these activities. Section 3 provides practical conceptual guidance on how to distinguish goods sent abroad for processing, goods under merchanting and general merchandise trade. An example of the impact on supply and use tables (SUT) is included. Section 4 looks at the impact on supply use table analysis and discusses how the new data should be presented to users. This includes the reconciliation of national accounts data with International Merchandise Trade Statistics (IMTS) data. Section 5 describes the sources and methods that can be used to compile goods sent abroad for processing and processing services, including the use of Nature of Transaction (NoT) codes within International Trade in Goods Statistics (ITGS) (or IMTS outside the EU) and surveys. 5
Purpose of the manual Section 6 reviews the recommendations of the Eurostat Task Force on Goods sent abroad for Processing and the steps needed to implement the recommendations. Separate Annexes are included covering model survey questions to collect Goods for Processing information, case studies developed by the Task Force setting out the use of IMTS Nature of Transaction codes and an extract from the IMTS Supplement to the Compiler Manual showing use of Nature of Transaction codes. A Glossary is included to ensure consistent terminology is used across the compiling and user community. 6
Summary conclusions Summary conclusions (a) (b) (c) (d) Globalisation has led to a sharp rise in cross-border production, with an associated increase in the value of goods sent abroad for processing. Under ESA 95, a change of ownership was imputed for goods sent abroad for processing. However, ESA 2010 reflects the view that imputing a change of ownership did not reflect the economic reality and that no change in ownership should be made for goods sent abroad for processing, where none has taken place. The increasing importance of such global production and the new international standards will often require EU Member States to develop new approaches to capture these measures in the national accounts and balance of payments statistics on a consistent basis. The focus of this manual is on goods sent abroad for processing, but also covers other trade-related globalisation activities. Sections include: Goods sent abroad for processing and returned to the original owner after processing; Goods sent abroad for processing, but subsequently sold abroad (either within the country of the processor, or a third country) without returning to the country of the owner (or principal); Goods under merchanting. Goods that change ownership, but are never physically present in the compiling economy; Manufacturing services on physical inputs owned by others; Quasi transit trade. The different activities require different approaches. It is not yet possible to agree a common source for each activity across all Member States as the potential sources are not all available or equally reliable in each country. However it is possible to make some general recommendations on sources and methods to allow robust estimates of goods for processing and manufacturing services on physical inputs owned by others to be compiled. These are set out in Section 5. It is recommended that work to harmonise sources and methods continues. It is recommended that Member States produce a reconciliation table setting out how the IMTS source data is adjusted to convert merchandise trade statistics to trade in goods on a national accounts/balance of payments basis. An example of such a reconciliation table is set out below: Table 1: Reconciliation between International Merchandise Trade Statistics and trade in goods on a national accounts basis Merchandise Trade statistics from IMTS source Exports Imports Goods sent abroad for processing Deduct n/a Goods returned from abroad after processing n/a Deduct Goods sent abroad after processing in compiling economy Deduct n/a Goods received from abroad for processing n/a Deduct + Goods sold abroad after processing in other economies Add n/a + Goods acquired in other economies for processing abroad n/a Add + Net exports of goods under merchanting Add n/a = Trade in goods on a national accounts basis Where n/a = not applicable 7
Summary conclusions (e) (f) (g) (h) (i) Where Member States have retained and quality assure 2-digit Nature of Transaction (NoT) codes, then IMTS trade data remains an important source of information on goods sent abroad for processing and goods returned after processing. For countries that do not collect or quality assure 2-digit NoT codes as part of IMTS, additional data collection will be required. Goods that are subsequently sold abroad after processing can be identified by NoT codes, but will be valued at the price they were originally sent abroad and not include the value of the processing. It is recommended that the NoT codes are analysed to determine whether the activity is important in the compiling economy and if necessary additional questions are added to existing surveys to collect the value of goods sold abroad after processing. In countries where inward or outward processing is important and NoT codes are not of sufficient quality it is recommended that countries add questions to existing enterprise surveys (such as Structural Business Statistics surveys), or Balance of Payments surveys. A list of the questions for possible inclusion is given in Annex A. This list should be adapted to Member States requirements, in order to balance the need for more data against the demand to reduce (or at least not increase) burdens on business. Where information is available from both enterprise/bop and IMTS sources, the results should be compared and reconciled, so that best estimates can be made according to the relative merits of the sources. Separate reconciliation should be undertaken for both inward processing (where resident processor does not take ownership of the goods) and outward processing (where the resident company retains ownership of the goods). If possible, the reconciliation should be made on an individual company by company basis. If that is not possible, aggregate data should be reconciled on a monthly or quarterly basis. Differences will occur and should be verified with the individual traders where possible. An example of the sort of validation that can be undertaken is shown below. Table 2.1: Inward Processing reconciliation of IMTS Nature of Transaction code data with survey sources Goods received from abroad for processing Goods returned to non-resident owner after processing Value of processing (export of manufacturing services) IMTS NoT Survey source Difference Table 2.2: Outward Processing reconciliation of IMTS Nature of Transaction code data with survey sources. Goods sent abroad for processing Goods returned from abroad after processing Value of processing (import of manufacturing services) (j) IMTS NoT Survey source Difference The reconciliation exercise should determine the relationship between the different sources and whether the existing high frequency IMTS data should be adjusted to reflect the enterprise survey results. IMTS data can meet the need to produce quarterly national accounts and balance of payments statistics, if suitable adjustment factors can be derived from the (generally) less frequent enterprise survey reconciliation. 8
Summary conclusions (k) (l) (m) (n) (o) The value of manufacturing services on physical inputs owned by others should not be estimated as the difference between goods sent abroad and returned after processing from IMTS NoT codes. Even where reliable data exists on the values of goods sent abroad for processing and returned after processing, the value of the processing service cannot simply be assumed to be the difference between the values (BPM6 para 10.70). Instead, the value of exports and imports of manufacturing services should be collected as part of existing BoP or trade in services data collection. The results should be compared with the value of goods sent abroad less returned after processing, to check that differences can be explained by holding gains/losses and the inclusion of overheads (such as marketing and financing included in the finished good price). If possible, this validation should be undertaken at the enterprise level. A product breakdown of goods sent abroad for processing and returned after processing, for both outward and inward processing is required for SUT balancing. This is required to adjust the imports and exports figures from IMTS and it is recommended that the product breakdown be based on IMTS data where possible. The industry breakdown of outward processing (imports) for SUT purposes can be classified according to the general industrial classification of economic activities within the European Union (NACE Rev.2), the European version of the international standard industrial of all economic activities (ISIC 2008) of the goods being processed e.g. clothing products, petroleum products, computer products. It is recommended that prices charged for each processing activity are assumed to move in line with the Producer Price Index (PPI) for that manufacturing activity. Data sharing. Member States are encouraged to continue to remove obstacles to sharing microlevel data. This is particularly relevant for multinational enterprises (MNEs) engaged in goods for processing activity. 9
Introduction 1 Section 1 Introduction 1.1 The production processes for many goods such as oil, garments, electrical goods and motor vehicles, are increasingly spread across more than one country in order to reduce costs (labour and capital), take advantage of investment incentives offered by host countries, and reduce companies global tax burden. The increasing importance of globalised production led to a review of trade in goods sent abroad for processing in the international standards. 1.2 Previously, ESA 95 imputed a change of ownership when goods were sent abroad for processing. Even when there was clearly no change of ownership and the only payment was for the cost of processing, ESA 95 required transactions for the value of goods sent abroad and then returned after processing to be imputed for presentation in the national accounts. This was relatively straightforward, as data was captured by the International Merchandise Trade Statistics (IMTS) systems Intrastat and Extrastat which are based on the physical movement of goods across borders, irrespective of whether there is a real change of ownership. 1.3 The growth in cross-border processing led to concerns about the rise in exports and imports of goods, the dependence on transfer pricing (usually between affiliates) to determine values, and the inconsistency with the corresponding financial transactions. The treatment was therefore reviewed in the update of international standards. 1.4 The review concluded that with the increasingly international nature of production, imputing a change of ownership for goods sent abroad for processing did not reflect the economic reality. Under ESA 2010 and BPM6, imputations for changes in ownership should no longer be made when goods are sent abroad for processing. There is now consistency between the National Accounts and Balance of Payments standards, as BPM5 always required a change of ownership to be imputed, while ESA 95 (and SNA 93) only required a change of ownership to be imputed where processing led to a substantial change in the nature of the good. 1.5. The simplest example of goods sent abroad for processing is as follows: A computer manufacturer (the principal) based in country A sends component parts to a processor in country B for assembly. The processor assembles the components and returns the finished product (computers) back to the computer manufacturer in country A. The computer manufacturer retains ownership of the components and finished goods throughout the process and pays the processor a fee for the assembly work. 1.6 As the principal retains ownership of the goods throughout the process, there is no change of ownership and no trade in goods transaction under ESA 2010. Instead, the computer manufacturer buys a service from the processor, and this is recorded as an import of processing service in the international trade figures of country A, and an export for country B. A new trade in service category manufacturing services on physical inputs owned by others is included in BPM6 (and MSITS2010) and ESA 2010 in order to record and to present this activity. 1.7 Often the processor and the principal will be related companies within a multinational enterprise. However, this is not always the case and the ESA 2010 treatment is not dependent on the relationship between the processor and the principal, but rather on whether the goods change ownership. 1.8 Determining whether goods have changed ownership will not always be straightforward, especially when goods move between a parent and an affiliate abroad. Goods may be sent abroad for on-sale in the country of the affiliate, or they may be sent abroad for processing. Under BPM6 para 3.46, the best test of ownership is: 10
Introduction 1 to identify which location assumes the risks and rewards of ownership most strongly (e.g., from factors such as whether the goods are included in the accounts, and which location is responsible for subsequent sale of the goods). 1.9 If the affiliate abroad assumes the risks and rewards of ownership of the goods, then treat the cross-border movement of goods as trade in goods. If, however, the parent retains the risks and rewards of ownership, treat as goods sent abroad for processing, and exclude them from exports and imports of goods. 1.10 There are many variants of the basic model. For example, the principal (country A) may sell the finished products directly to country B without bringing them back to country A. In this case, the principal of country A still pays a processing fee to the processor of country B, but an export of goods to country B is recorded as the finished goods now change ownership. Similarly, if the principal sells the finished goods directly from country B to a customer in a third country C, then again a payment of a processing fee is recorded in country A as an import of a service, and an export of goods from country A to country C should also be recorded. 1.11 While the concept underpinning the new standards is clear and there is consistency with the recording of financial transactions, implementing the standard is not straightforward. The main source of information for cross-border goods transactions is International Merchandise Trade Statistics (IMTS). IMTS records the cross-border movement of goods, irrespective of whether there is a change of ownership. Therefore goods sent abroad for processing with no change of ownership will continue to be recorded in IMTS. For the national accounts, the IMTS data must be adjusted to remove the cross-border flows of goods sent abroad for processing and returned after processing with no change of ownership. In addition, any goods that are subsequently sold (or purchased) abroad, without returning to the country of the owner, need to be added to the IMTS data. This issue is discussed in detail in Section 5. 11
ESA 2010 guidance 2 Section 2 ESA 2010 guidance Goods for processing and processing services 2.1 Using the change of ownership principle to help determine whether a process is producing a good or a service, is emphasised in ESA 2010 (9.48e): Imports and exports occur when there is a change of ownership between residents and nonresidents. Physical movement of goods across national borders does not by itself imply an import or export of these goods. Goods sent abroad for processing (without a change of ownership between residents and non-residents) are not recorded as exports and imports. 2.2. ESA 2010 (18.33): Between ESA 95 and ESA 2010, there has been a fundamental change in the treatment of goods sent abroad for processing without change of ownership. In ESA 95, such goods were shown as exports on being sent abroad, and then recorded as imports on return from abroad, at a higher value as a result of the processing. This was known as the gross recording method, and effectively imputes a change of ownership so that international trade figures represent an estimate of the value of the goods being traded. The 2008 SNA, BPM6 and the ESA 2010 do not impute a change of ownership, but rather show only one entry an import of the processing service. This would be an export of the service for the country in which the processing takes place. This recording is more consistent with the institutional records and associated financial transactions. It does however cause an inconsistency with the international merchandise trade statistics (IMTS). This will continue to show the gross value of the exports for processing and returning imported processed goods. 2.3 This paragraph highlights the inconsistency with IMTS the main source of information on exports and imports of goods data in the national accounts which continues to measure crossborder flows of goods, irrespective of whether they change ownership. The compiler of trade in goods statistics for both BoP and NA must now separately identify cross-border flows of goods for processing, where there is no change of ownership. The options for collecting this data are set out in Section 5. 2.4. In order to reconcile national accounts and balance of payments trade in goods data, with the IMTS data, it is recommended that the value of the goods sent abroad for processing and returning from abroad after processing are recorded as supplementary items. This also allows a reconciliation table to be produced showing the transition from merchandise trade statistics to exports and imports of goods on a BoP and National Accounts basis. This is discussed further in Section 4. 2.5. ESA 2010 suggests the net processing service (equivalent to manufacturing services on physical goods owned by others) can be presented as the difference between the goods sent abroad for processing, less the goods returned after processing. This is too simplistic an approach, and other options for estimating manufacturing service exports and imports are discussed further in Section 5. 2.6. While goods sent abroad for processing with no change of ownership are now excluded from general merchandise, freight transport and insurance costs may still be incurred. To convert imports from CIF to FOB needed for national accounts and BoP, the value of freight and insurance to the border of the importing country should be deducted. Where these freight and insurance services are provided by a non-resident an import of transportation services should be recorded. 12
ESA 2010 guidance 2 Goods under merchanting 2.7 In contrast to goods sent abroad for processing which cross a country s border, but are not included in trade in goods, there are exports of goods that occur without the goods crossing the country's border. One example is merchanting which is defined by ESA 2010 (3.164) as:...the purchase of a good by a resident from a non-resident and the subsequent resale of the good to another non-resident, without the good entering the merchant s economy. 2.8 ESA 2010 (9.48 e) contrasts merchanting with goods sent abroad for processing:...in contrast, buying and reselling goods with non-residents without the goods entering the merchant s economy are recorded as imports and exports in the accounts of the producer and final purchaser, and a net export of goods under merchanting is shown in the accounts of the merchant economy. 2.9 This is a change from the BPM5 and ESA 95 treatment, which excluded merchanting from trade in goods, but instead included the difference between the sale and purchase of goods as a merchanting service category within other business services. BPM5 recognised this treatment as an exception to the change of ownership principle. Under BPM6 (10.44) goods under merchanting are recorded as follows: (a) (b) (c) (d) The acquisition of goods by merchants is shown under goods as a negative export of the economy of the merchant; The sale of goods is shown under goods sold under merchanting as a positive export of the economy of the merchant; The difference between sales over purchases of goods for merchanting is shown as the item net exports of goods under merchanting ; Merchanting entries are valued at the transaction price agreed by the parties, not FOB. 2.10 The new treatment of merchanting is consistent with the change of ownership principle. Merchanting requires goods to change ownership and so transactions are recorded in the trade in goods account. If there is no change of ownership, there is no merchanting transaction, although there may be manufacturing services on physical inputs owned by others, if the goods are processed for a fee. 2.11 The standard model of goods under merchanting is that goods are purchased by a company in country A from a producer in country B. The goods are sold on to a customer in country C, but without the goods ever entering country A. 13
ESA 2010 guidance 2 2.12 This example is set out in Figure 1 below (from the United Nations publication The Impact of Globalization on National Accounts). Figure 1: Merchanting of goods (resident merchant) Merchant in country A purchases goods from country B and sells to country C (From the Handbook on Globalisation) Country B Producer Country C Purchaser 80 Country A Merchant (compiling economy) 100 Physical movement of goods Ownership of goods Cash flow 2.13 The ESA 95/BPM5 and ESA 2010/BPM6 treatment of the merchanting example above is shown in Table 3. The merchant in country A buys goods worth 80 from a producer in country B and sells them for 100 to a customer in country C, without the goods ever entering country A. Under ESA 95, country A records the export of a merchanting service of 20 as the difference between the buying and selling price. Country B records an export of goods of 80 and country C records an import of goods of 100, equivalent to the transaction prices of the purchase and sale. Table 3: Treatment of merchanting activity in ESA 95/BPM5 and ESA 2010/BPM6. ESA 95 / BPM5 treatment ESA 2010 / BPM6 treatment Export Import Export Import Country A Goods under merchanting 100 Goods under merchanting -80 Net exports of goods under merchanting 20 Country A Goods Services: merchanting 20 Country B Goods 80 Country B Goods 80 Country C Goods 100 Country C Goods 100 Global balance (sum of above) Goods Services: merchanting 80 20 100 Global balance (sum of above) Goods (of which goods under merchanting) 2.14 So under ESA 95 a global imbalance occurs within the categories of goods and services, as the country where the merchant is resident (country A) includes exports of merchanting services, while country B and country C record the value of the goods entering or leaving the country. There is a balance at the level of goods and services combined. 100 (20) 100 14
ESA 2010 guidance 2 2.15 Under ESA 2010, this imbalance is removed by treating merchanting transactions as trade in goods. The acquisition of goods by the merchant in country A is shown under goods as a negative export, while the sales are recorded as a positive export. The difference between sales and purchases of goods under merchanting are recorded as net exports of goods under merchanting in country A. Country B and C continue to record the value of the goods entering and leaving the country. Now the global balance in goods shows 100 recorded for both global exports and global imports of goods. 2.16 Merchanting is only recorded in the accounts of the country in which the merchant is resident. In the counterpart countries, export sales to merchants and import purchases from merchants are included indistinguishably within general merchandise. 2.17 ESA 2010 Reference: chapter 18, paragraph 18.38: Merchanting is defined as the purchase of goods by a resident (of the compiling economy) from a non-resident combined with the subsequent resale of the same goods to another non-resident without the goods being present in the compiling economy. Merchanting occurs for transactions involving goods where physical possession of the goods by the owner is unnecessary for the process to occur. 2.18 ESA 2010 (18.39) goes on to explain: Merchanting arrangements are used for wholesaling and retailing. They may also be used in commodity dealing and for the management and financing of global manufacturing processes. For example, an enterprise may contract the assembly of a good among one or more contractors, such that the goods are acquired by this enterprise and resold without passing through the territory of the owner. If the physical form of the goods is changed during the period the goods are owned, as a result of manufacturing services performed by other entities, then the goods transactions are recorded under general merchandise rather than merchanting. In other cases where the form of the goods does not change, the goods are included under merchanting, with the selling price reflecting minor processing costs as well as wholesale margins. 2.19 ESA 2010 recognises that merchanting is often undertaken as part of global manufacturing and therefore it should be considered alongside goods for processing. ESA 2010 makes a distinction between goods that are either transformed or not transformed, where there is change of ownership but do not enter the compiling economy. Goods that are transformed should be included in general merchandise, while goods that are not transformed, should be recorded as goods under merchanting. 2.20 No further guidance is given on the distinction between merchanting (no transformation) and general merchandise (transformation). A general rule is needed, so it is recommended that goods that have been processed in any way are assumed to have been transformed and therefore treated as general merchandise, rather than merchanting. Goods that have been simply repacked or labelled are not considered to have been transformed in any way. Therefore goods that are simply repackaged or cleaned do not change physical form and should be recorded as goods under merchanting. Goods that have been assembled, refined or undergo any manufacturing process should be recorded as general merchandise, even though the goods do not enter the compiling economy. This treatment is in line with BPM6 guidance (box 10.1) ( 1 ). 2.21 If a merchant resells goods to a resident of the same economy as the merchant, this is not merchanting, but rather imports of general merchandise. In this case, the goods enter country A of ( 1 ) It is important to note, that this rule is only used to distinguish between merchanting and merchandise trade where goods change ownership and do not enter the compiling economy. Goods sent abroad for processing where there is no change of ownership, are excluded from trade in goods. Instead, any processing activity from simple repacking to more significant manufacturing services is treated as manufacturing services on physical inputs owned by others. 15
ESA 2010 guidance 2 the merchant, so no longer fit the definition of international merchanting. Similarly, in the European Union accounts, merchanting only includes purchases and sales of goods with non-eu residents (ESA 2010 19.17): In European accounts, merchanting includes only the purchase of goods by a resident of the European Union / the euro area from a non-resident with the subsequent resale of the same goods to a non-resident without the goods being present in the European Union / the euro area. It is recorded first as a negative export of goods and then as a positive export of goods, with any timing differences between the purchase and sale being recorded as changes in inventories (See paragraphs 18.41 and 18.60). When a merchant which is resident of the European Union / euro area buys goods from a non-resident and then sell them to a resident of another Member State, the purchase is recorded as negative exports in the national accounts of the Member State of the merchant but as imports in European accounts. 2.22 Merchanting of services is a concept introduced in BPM6. It includes subcontracting or outsourcing of service work to another contractor (BPM6 10.160): Business and other services, such as transport, construction, and computing, may be subcontracted. This arrangement may also be called outsourcing. For example, a specialist service arranger may be paid to provide back-office functions for a customer, which the service arranger subcontracts to another contractor. Thus, subcontracting is similar in some ways to merchanting of goods, because the services are purchased and resold. However, for services, the degree of transformation involved may be harder to assess than for goods, such as in the case of bundling and managing the services of different contractors. Service merchanting of this kind is an important activity in some economies. The value of services exported and imported in the economy of the service arranger is recorded on a gross basis. (This treatment is applicable because the arranger buys and sells the services; if the arranger acted as an agent on a commission basis, then only the commission would be recorded as the service provided by the arranger.) These services are classified to the appropriate specific service classification, such as transport, construction, computing, or other business services. (See also paragraph 10.75 for transport.) However, if the activity is significant for an economy, net data could be provided on a supplementary basis. 2.23 BPM6 allows for net merchanting of services to be recorded on a supplementary basis, in addition to classifying them to the appropriate specific service classification (see BPM6 10.160) for those economies where service arrangers are important. 2.24 In addition to the standard merchanting example, where goods do not enter the reporting economy, there are also transactions between residents with a non-resident intermediary merchant, where goods remain in the reporting country. In this case, although there are no cross-border movements of goods, there is a change of ownership between residents and non-residents. These transactions should therefore be recorded as general merchandise. As data will not be available through the IMTS system, alternative sources will be required (such as from VAT declarations). 16
ESA 2010 guidance 2 Quasi transit trade 2.25 ESA 2010 18.28: Transit trade is where goods cross a country on their way to their final destination, and for the country crossed, are generally excluded from foreign trade statistics, Balance of Payments statistics and the national accounts. 2.26 In quasi transit trade, goods are imported into a country by a non-resident, and then re-exported to a third country, often in the same economic union, usually at a higher price. The country where the goods arrive for the customs clearance should exclude the goods from national imports and exports as the goods continue to be owned by the non-resident entity. The country which buys the goods should record the import. 2.27 ESA 2010 18.28 sets out the standard EU quasi transit trade example: Quasi transit trade are goods imported into a country, cleared through Customs for free circulation within the EU, and then dispatched to a third country in the EU. The entity used for Customs clearance is usually not an institutional unit as defined in Chapter 2, and so does not acquire ownership of the goods. In this case, the import is shown in the national accounts as a direct import to the final destination, as in the case of simple transit trade. The appropriate value is that recorded as the goods enter the final destination country. 2.28 As the country where the goods enter the EU does not take ownership of the goods, the value of the goods as they enter and leave the country should be excluded from the national accounts. European regulations however, require the transmission of BoP and IMTS data for EU and Euroarea aggregates at the point where goods are cleared for entry into the EU (or Euro-area). Data in line with this community principle will therefore include quasi transit trade. 2.29 There can be large differences between the value of goods when they enter the EU and when they reach their final destination. The treatment of quasi transit trade is designed to avoid double counting of trade that is included in EU aggregates. In EU aggregates (rather than national aggregates), the difference between the declared value of the goods when they enter the EU and the subsequent sales price is recorded as branding recorded as an import of services by the transit country from the owner of the goods. At least part of this difference in value may be due to transfer pricing by the owner of the goods, rather than any service activity. 2.30 While quasi transit trade usually refers to goods that are imported into a country before onward despatch to a third country, the same phenomena can occur for exports also. For example, wine exported from France to Russia may be cleared for Customs in Lithuania. In this case, the export is shown in the national accounts of France as a direct export to Russia. Lithuania does not take ownership of the goods, so the value of the goods as they enter and leave the country should be removed from IMTS for national accounts purposes. Non-resident transit trade 2.31 Non-resident transit trade is used to describe activity similar to quasi transit trade that is increasingly common in the EU. Non-resident transit trade is used to describe the situation where goods arrive from one Member State and are despatched to another Member State, by an owner that is not resident in either Member State. In this case, while there is physical movement of goods, there is no transfer in ownership of the goods, so the Member State where the goods transit will not record imports or exports of goods. If the owner is based outside the EU, then the EU aggregates will be affected however. 17
ESA 2010 guidance 2 2.32 Non-resident transit trade requires the compiler to identify cases where its own country does not acquire ownership of goods (both transit and quasi transit trade), so that they can be excluded from trade in goods exports and imports. In many EU Member States, non-resident traders are obliged to register for VAT in any country where they realise a taxable transaction, including the intra-eu supply or acquisition of goods. These non-resident VAT registrations therefore become Intrastat respondents in the country where they are trading, even though they may have no physical presence. The local VAT number may identify their non-resident nature. 2.33 A non-resident company might choose to enter goods in a particular EU country for a number of reasons locational, VAT deferral schemes, or to take advantage of warehousing or value added logistics (e.g. quality inspection, repackaging etc.). The goods are subsequently dispatched to the final customer in another EU country, who pays the full price for the goods directly to the nonresident merchant. The non-resident merchant will separately pay the processor in the transit country for any processing services received. IMTS will be the prime source of data for quasi transit trade. 2.34 Figures 2.1 and 2.2 show the recording of quasi transit trade in both national and EU accounts. 2.35 In the first example, the merchant in country Y buys goods from country X for the wholesale price of 100 and sells these goods to country B for the transactions price of 150 (including purchased services and profit margin of the merchant in country Y). A local fiscal representative in transit member state A, in addition to taking care of the customs arrangements, sub-contracts to a specialised enterprise the undertaking of quality inspections before the goods are shipped. He gets reimbursed for his services by the merchant in Y with 20. These services are reflected in the higher goods value when dispatched to member state B; however, they also need to be recorded as separate transactions in the balance of payments of A, because residents of member state A provided services to country Y for which they were explicitly compensated. Figure 2.1: Recording of quasi transit trade in national accounts and national BoP ( 2 ) 100 Country Y 20 150 Country X Country A Country B Physical movement of goods Financial settlement Country Y Country A Goods under merchanting with X 100 Exports of trade related services 20 Goods under merchanting with B 150 Net exports of goods under merchanting 50 Country B Imports of trade related services 20 General merchandise import from Y 150 Country X General merchandise export to Y 100 ( 2 ) From Chapter 9 of the Guide to measuring global production: Measurement issues associated with quasi transit trade and similar phenomena. 18
ESA 2010 guidance 2 2.36 As shown in Figure 2.1, goods under merchanting are recorded in the accounts of the merchanting country Y (owner of the goods), with the difference in price representing the merchants margin. The transit member state A records only services exports to country Y, while Country X and B record exports and imports of goods, respectively, to and from country Y. This treatment is dependent on data being available in IMTS. IMTS 2010 recommends that partner country for exports should be the country of last known destination or country of consignment, while for imports it should be country of origin or consignment. The EU requirement is for country of final destination for exports and country of origin for imports. In Figure 2.1, country X is likely to declare general merchandise exports with partner A (country of consignment) or country B (country of final destination), but not with partner Y. Country B will declare a general merchandise import from country A (country of consignment) or possibly country X (country of origin), but not country Y. 2.37 Example 2 repeats largely example 1; however, country X and Y are both outside the EU, and country A and B are inside the EU. The merchant in country Y buys goods from country X for the price of 100. The goods are first cleared for customs in EU member state A by a local fiscal representative. In addition, he sub-contracts to a specialised enterprise the undertakings of quality inspections before the goods are being shipped and dispatched to end-consumer B. He is reimbursed for his services by the merchant in Y with 20. Figure 2.2: Recording of quasi transit trade in EU aggregates 100 Country Y 20 150 EU Country X Country A Country B Physical movement of goods Financial settlement Country Y European Union Goods under merchanting with X 100 General merchandise import from Y 100 Goods under merchanting with B/EU 150 Import of branding services from Y 50 Net exports of goods under merchanting 50 Exports of manufacturing services 20 Imports of manufacturing services 20 Country X General merchandise export to Y 100 2.38 In EU countries where non-resident VAT registrations play a role, imports and exports by such non-resident VAT registrations should be separately identified from their specific tax identifier and excluded from the IMTS dataset for national accounts purposes. Non-resident VAT registrations are generally allocated a specific tax identifier that identifies their non-resident status. Imports and exports from these non-resident VAT registrations can then be identified in the IMTS dataset and removed for national accounts and BoP purposes. 2.39 It is recommended that national accounts compilers work with their Customs authorities to identify non-resident traders and ensure they meet national accounts, not just tax definitions of nonresident. Two more examples of quasi transit trade are provided in Annex E. 19
ESA 2010 guidance 2 Goods for repair 2.40 Goods temporarily sent abroad for repair, with no change of ownership are excluded from general merchandise in the same way goods for processing (with no change of ownership) are excluded. In addition, the value of the maintenance and repair service is included within services in ESA 2010 and BPM6 maintenance and repair services n.i.e. 2.41 BPM6 para 10.22. Items to be excluded from general merchandise because there is no international transaction. (e) Goods temporarily exported or imported without a change of ownership. Examples include goods for repair, as part of an operating lease, and for storage, and animals or artifacts for participation in exhibitions or competitions. 2.42 BPM6 para 10.72: Maintenance and repair services n.i.e. cover maintenance and repair work by residents on goods that are owned by non-residents (and vice versa). Re-exports 2.43 Re-exports are foreign goods which are imported into the reporting economy by a resident, so there is a change of ownership (in contrast to quasi transit trade), but then re-exported without substantial transformation. As there is a change of ownership, re-exports are included in both national accounts and balance of payments. 2.44 ESA 2010 Para 18.28 Re-exports are foreign goods (goods produced in other economies and previously imported with a change of economic ownership) that are exported with no substantial transformation from the state in which they were previously imported. Because re-exported goods are not produced in the economy concerned, they have less connection to the economy than other exports. Economies that are major trans-shipment points and locations of wholesalers often have large values of re-exports. 2.45 ESA 2010 recommends that re-exports are separately identified from other trade as they have little impact on the domestic economy. Goods that have been imported and are waiting to be reexported should be recorded in inventories of the resident economic owner. 20
Conceptual issues 3 Section 3 Conceptual issues Guidance 3.1 The flowchart in Figure 3 is a decision tree to help the compiler classify transactions as goods sent abroad for processing, merchanting and general merchandise trade. The first question is whether there is a change of ownership. If there is no change of ownership and the goods are sent abroad and returned after processing, then the movements should be classed as goods sent abroad for processing and excluded from exports and imports of goods. If there is a change of ownership, but the goods do not enter the compiling economy, then the goods should be included as merchanting (or general merchandise if the goods are transformed before being sold). Figure 3: Decision tree Does resident unit buy or sell goods to a non - resident unit? Yes No Do goods enter or leave economy? Do goods enter or leave economy? No Yes No Yes Are the goods processed? Are the goods processed (or repaired)? No Yes Yes No General merchandise Merchanting, if goods are sold to a 3rd country Manufacturing services + general merchandise Manufacturing services (or repair services) No NA or BoP transaction Note: Resident units do not include non-resident VAT registrations 21
Conceptual issues 3 Numerical example 3.2 The change in the treatment of goods for processing has a major impact on national accounts compilation, including Supply Use Table (SUT) compilation and analysis. This section will set out the change by looking at a worked example. 3.3 Consider the case where a computer manufacturer outsources assembly to a non-resident affiliate. The computer manufacturer in country A sends computer parts to be assembled by its foreign affiliate in country B, to take advantage of lower wage rates. The finished computers are then returned to the computer manufacturer in country A, where they are sold to domestic consumers. In order to cross the border, transfer prices will be necessary in order that tax authorities can assess import and export duty on the goods, where applicable. 3.4 In ESA 95 a change in ownership of the computer parts is imputed, but under ESA 2010, there is no change of ownership. The situation is considered from the point of view of the computer manufacturer in country A and the foreign affiliate in country B. 3.5 Under ESA 95, country A records an export of 50 and subsequent import of 90 is recorded. The difference represents the processing fee, although this is not recorded under ESA 95. Figure 4: ESA 95 treatment of goods for processing ESA 95 treatment of goods sent abroad for processing (for owners economy country A) Computers, components + services Output (P.1) Imports of goods (P.71) Imports of serv. (P.72) Total supply Intermediate consumption (P.2) Household expenditure (P.3) Exports of goods (P.61) Exports of serv. (P.62) 50 90 140 90 50 140 ESA 95 treatment of goods sent abroad for processing (for processors economy country B) Computers, components + services Output (P.1) 90 (50+40) Imports of goods (P.71) Imports of serv. (P.72) Total supply Intermediate. consumption (P.2) Household expenditure (P.3) Exports of goods (P.61) Exports of serv. (P.62) 50 140 50 90 140 3.6 In the above table, the imports and exports of goods should match the entries in the IMTS dataset. 3.7 In ESA 2010 goods for processing are recorded on a net basis, with only the trade in services transaction recorded. The cross-border movement in goods recorded in the IMTS is not included in the SUT. In our example, for the computer processing industry, the difference between the value of goods as they arrive and depart represents the processing fee. Under ESA 2010 this is recorded as an import of manufacturing services on physical inputs owned by others. Use Use 22